March 2 - Dow Jones (Christine Richard): "A flood of foreign capital into
U.S. dollar-denominated debt has some in the corporate bond market worried
that the market's aversion to risk is getting washed away. Risk premiums over
Treasurys on investment-grade bonds have been grinding tighter in recent months
with the average spread on Lehman's U.S. Corporate Investment Grade Index closing
out February at 85 basis points over Treasurys, down from 95 basis points over
Treasurys at the end of November. These skimpy risk premiums are being blamed,
at least in part, on steady buying by foreign central banks and other overseas
investors."

February 27 - Bloomberg (Darrell Hassler and Prashant Rao): "U.S. Treasury
investors are more complacent about the prospect of an economic shock causing
volatility in the $4.2 trillion market than at any time in at least 17 years."

March 2 - Bloomberg (Netty Ismail): "Indonesia raised $2 billion in its biggest
overseas debt sale, taking advantage of falling borrowing costs after the government
halted the rupiah's decline. The yield the government will pay on the 10-year
portion of the sale is almost 94 basis points less than what it cost in October
to sell debt of similar maturity. Borrowing costs on emerging-market debt relative
to U.S. Treasuries this week fell to the lowest ever."

Freddie Mac posted 30-year fixed mortgage rates dipped 2 bps to 6.24%, up
45 basis points from one year ago. Fifteen-year fixed mortgage rates were unchanged
at 5.89% (up 66 bps in a year). One-year adjustable rates rose 2 bps to 5.34%,
an increase of 120 basis points from one year ago. The Mortgage Bankers Association
Purchase Applications Index dipped 1.9% last week. Purchase Applications were
2.6% from one year ago, with dollar volume 2.4% lower. Refi applications were
about unchanged. The average new Purchase mortgage jumped to $230,900, while
the average ARM was little changed at $337,900.

Total Commercial Paper surged $22.9 billion last week to a record $1.704 Trillion. Total
CP is up $55 billion y-t-d (9wks), or 19.2% annualized, while having expanded
$270 billion over the past 52 weeks, or 18.8%. Last week, Financial
Sector CP borrowings surged $20.3 billion to $1.566 Trillion (up $57.3bn
y-t-d), with a 52-week gain of $275 billion, or 21.3%. Non-financial
CP gained $2.6 billion to $138.6 billion, with a 52-week decline of 3.8%.

Asset-backed Securities (ABS) issuance increased to $16 billion (from JPMorgan),
with Home Equity Loan (HEL) ABS issuance at about $8.0 billion. Year-to-date
total ABS issuance of $127 billion is running 17% ahead of 2005's record pace,
and y-t-d HEL issuance of $85 billion is 22% ahead of last year's record boom.

Fed Foreign Holdings of Treasury, Agency Debt ("US marketable securities held
by the NY Fed in custody foreign official and international accounts") jumped
$7.5 billion to a record $1.580 Trillion for the week ended March 1. "Custody" holdings
are up $60.8 billion y-t-d, or 23.1% annualized, and $201 billion (14.6%) over
the past 52 weeks. Federal Reserve Credit gained $5.0 billion last week.
Fed Credit has declined $5.6 billion y-t-d, or 3.9% annualized, to $820.8.
billion. Fed Credit has expanded 4.6% over the past 52 weeks.

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $465 billion, or 12.5%, over the past 12 months to a record
$4.193 Trillion.

March 2 - Bloomberg (Halia Pavliva): "Russia's foreign currency and gold reserves,
the world's fifth biggest, rose to a record $195.6 billion as of Feb. 24 as
revenue from oil and gas exports increased, the central bank said..."

Currency Watch:

The dollar index dropped 1% this week. On the upside, the Norwegian krone
gained 2.0%, the Philippines peso 2.0%, the Swiss franc 1.6%, and the Euro
1.4%. On the downside, the Peruvian new sol fell 1.1%, the Chilean peso 1.1%,
the South African rand 1.1%, and the Mexican peso 1.0%.

Commodities Watch:

This week silver traded to a 22-year high. April crude oil gained 76 cents
to $63.67. April Unleaded Gasoline jumped 8.4%, while April Natural Gas fell
7.2%. For the week, the CRB index gained 0.7%, putting the index almost back
to breakeven y-t-d. The Goldman Sachs Commodities index rose 1.4% this week,
with the 2006 decline reduced to 0.5%.

China Watch:

March 3 - Bloomberg (Rob Delaney): "China should cut its foreign exchange
reserves by more than two-thirds to reduce vulnerability to declines in the
currencies comprising the holdings, China Securities Times reported, citing
an economist. China needs $250 billion worth of foreign exchange reserves at
most, compared with the $819 billion in government coffers as of the end of
2005...citing Xiao Zhuoji, a Beijing University professor and member of the
China People's Political Consultative Congress, a government advisory body."

March 2 - Bloomberg (Clare Cheung and Nipa Piboontanasawat): "Hong Kong's
retail sales growth picked up in January as the city received more mainland
Chinese tourists during the Lunar New Year holidays. Retail sales grew 11.6
percent from a year earlier to... ($2.73 billion) after climbing a revised
6.8 percent in December..."

Asia Boom Watch:

February 28 - Bloomberg (Cherian Thomas and Anand Krishnamoorthy): "India's
government said it will increase investment in power plants, roads and ports
to help boost annual economic growth to 10 percent and challenge China as the
world's fastest-growing major economy. Stocks rose to a record. Spending will
rise 11 percent to 5.64 trillion rupees ($127 billion) in the year starting
April 1, Finance Minister Palaniappan Chidambaram said..."

February 27 - Bloomberg (Theresa Tang): "Taiwan's unemployment rate fell to
a five-year low in January as companies such as AU Optronics Corp. increased
investment to meet rising overseas demand for laptops and televisions. The
seasonally adjusted jobless rate dropped to 3.97 percent..."

March 1- Bloomberg (William Sim): "South Korea's exports grew at a faster
pace in February as companies shipped more goods after the Lunar New Year holidays
in January. Shipments rose 17.4 percent from a year ago to $239.6 billion after
rising a revised 3.8 percent in January..."

February 28 - Bloomberg (Seyoon Kim): "South Korea's industrial production
gained 6.1 percent in January, the most in more than seven years, as companies
produced more mobile phones and cars to meet rising demand at home and abroad."

February 27 - Bloomberg (Anuchit Nguyen): "Thailand's economic growth will
accelerate this year due to rising exports, company investments and domestic
spending, the finance ministry said. The country's gross domestic product may
expand 5 percent this year from an estimate of 4.5 percent in 2005..."

March 1- Bloomberg (Aloysius Unditu and Arijit Ghosh): "Indonesia's inflation
accelerated more than economists expected in February, increasing pressure
on the central bank to raise its benchmark interest rate. Consumer prices in
Southeast Asia's biggest economy rose 17.9 percent from a year earlier..."

Unbalanced Global Economy Watch:

February 27 - Bloomberg (Theophilos Argitis): "Canada's current-account surplus
widened to a record in the last three months of 2005 on more exports of natural
gas and cars. The surplus on the current account...widened to C$13.3 billion
($11.6 billion) from C$7.76 billion in the third quarter... The surplus for
all of 2005 rose to a record C$30.2 billion."

February 27 - Bloomberg (Laura Humble): "U.K. home loans approved by banks
rose 32 percent in January from a year earlier as the country's $6 trillion
property market strengthens."

February 28 - Financial Times (Ralph Atkins): "Lending to eurozone consumers
and to businesses is growing at the fastest rate since the start of the decade,
supporting a European Central Bank interest rate rise this week, and
possibly again later this year. Loans to households in January grew at an
annual rate of 9.4 per cent - the fastest since the first quarter of 2000,
according to ECB data... Lending for house purchases grew at a rate of 11.7
per cent. Lending to businesses - or 'non-financial corporations' - also
accelerated, increasing at an annual rate of 8.5 per cent, the fastest since
the second quarter of 2001. The pick-up in business borrowing almost certainly
reflected the surge in corporate takeovers led by private equity groups and
more recent intercompany merger and acquisition activity."

February 27 - Bloomberg (Simone Meier): "Money supply growth in the economy
of the dozen euro nations accelerated in January for the first month in four
as the European Central Bank prepares to raise interest rates this week. M3,
the ECB's preferred measure of money supply, rose 7.6 percent from a year earlier,
up from a 7.3 percent gain in December..."

March 1- Bloomberg (Matthew Brockett): "Inflation in the dozen nations using
the euro stayed above the European Central Bank's ceiling for a 13th month
in February, supporting the bank's case to raise interest rates. Consumer prices
rose 2.3 percent from a year ago after gaining 2.4 percent in January..."

March 3 - Bloomberg (John Fraher and Jeffrey T. Lewis): "The economy of the
dozen euro nations will grow at the fastest pace since 2000 in the first three
quarters of this year, the European Commission said."

March 1- Bloomberg (Simone Meier): "Manufacturing in the dozen nations sharing
the euro grew in February at the fastest pace in 19 months as the European
Central Bank prepares to raise interest rates. Bonds fell, and stocks and the
currency climbed. An index based on a survey of about 3,000 purchasing managers
rose to 54.5, the highest since July 2004, from 53.5 in January..."

February 28 - Bloomberg (Gabi Thesing): "Confidence among European executives
and consumers increased to the highest in almost five years in February as
economic growth in the region accelerated."

March 2 - Bloomberg (John Fraher): "German retail sales rose the most in more
than a year in January and orders for plant and machinery surged, adding to
evidence that growth in Europe's largest economy is gathering pace."

February 28 - Bloomberg (Ben Sills): "Inflation in Spain, Europe's fifth-largest
economy, held near a nine-year high in February even as oil prices fell. Consumer
prices rose 4.1 percent from a year ago..."

March 1- Bloomberg (Jacob Greber): "Manufacturing in Switzerland grew at the
fastest pace in almost two years in February, supporting the Swiss central
bank's view that Europe's eighth-largest economy is strong enough to absorb
higher interest rates."

February 28 - Bloomberg (Trygve Meyer): "The pace of borrowing by Norwegian
households and businesses in January advanced, adding pressure on the Nordic
country's central bank to raise interest rates for a third time since June.
Credit growth for households, companies and municipalities accelerated to an
annual 13.4 percent, from a revised 13.2 percent in December..."

March 2 - Bloomberg (Trygve Meyer): "Norway's unemployment rate in February
dropped for the first time since November as college graduates who joined the
ranks of jobseekers at the start of the year found jobs. The unemployment rate
fell to 3 percent from 3.3 percent in January..."

February 27 - Bloomberg (Tracy Withers): "New Zealand consumers borrowed 15.1
percent more in January for housing and consumption than a year earlier, according
to figures from the Reserve Bank."

January Personal Income was up 5.8% y-o-y, with Compensation up 5.5%. Personal
Spending was up 6.8% y-o-y, led by a 9.6% gain in Non-Durables spending. The
Personal Consumption Expenditures (PCE) Price Index was up 3.1% y-o-y in January.
For comparison, the PCE Price Index was up 2.7% y-o-y in January 2005, 2.0%
y-o-y in January 2004 and 2.1% in Jan. 2003. The February ISM index rose 1.9
to a stronger-than-expected 56.7. The ISM New Orders component jumped almost
four points to 61.9, the strongest reading since December 2004. The ISM Non-Manufacturing
index increased 3.3 to an impressive 60.1, led by a 7 point jump in the Employment
component.

Total January Home Sales (New and Existing) were down 4% from a year earlier
to a seasonally-adjusted annualized pace of 7.793 million units. This was 8%
above the January 2004 level. Existing Home Sales were down 5.2% from January
2005, although Average Prices were up 9.1% to $261,200 ("calculated annualized
transaction value" (CTV) up 3.4% y-o-y). New Home Sales were up 3.3% from the
year ago period to an annualized 1.233 million (up 7% from Jan. 2004). Average
Prices were up 3.0% y-o-y to $291,600. New Homes CTV was up 6.4% from January
2004. The Inventory of Unsold New Homes jumped 13,000 to a record 528,000,
a whopping 21% increase from one year ago and up 40% from January 2004.

And speaking of rising home inventories, from the California Association of
Realtors (C.A.R.): "C.A.R.'s Unsold Inventory Index for existing, single-family
detached homes in January 2006 was 6 months, compared with 3.2 months for the
same period a year ago." January home sales in the Golden State were down
a notable 24% from the year earlier period. Interestingly, at $551,300, California
Median Prices were second only to Augusts record $568,730. Prices were up 13.8%
($66,720) over the past year, with a two-year gain of 36% ($146,840). Condo
Median Prices were up 14.6% ($54,810) y-o-y to $430,610, with a two-year gain
of 42% ($127,550).

Financial Sphere Bubble Watch:

March 2 - Dow Jones: "U.S. bank earnings rose 9.6% in 2005 to a record $134.2
billion, even as earnings in the fourth quarter declined from the record level
of the third quarter, the Federal Deposit Insurance Corp. said... Bank earnings
last quarter were $32.9 billion, down 5% from the previous quarter... The average
return on assets fell to 1.22% from 1.25% a year earlier. The FDIC said fourth
quarter profits reflected slowing growth in residential mortgages, continued
low net interest margins and a sharp increase in net charge-offs of credit
card loans."

Mortgage Finance Bubble Watch:

February 28 - Dow Jones: "Average U.S. home prices increased 12.95% from the
fourth quarter of 2004 through the fourth quarter of 2005, the Office of Federal
Housing Enterprise Oversight reported... OFHEO, the agency responsible for
overseeing the financial safety and soundness of Fannie Mae and Freddie Mac,
said appreciation for the most recent quarter was 2.86%, or an annualized rate
of 11.4%. The increase during 2005 is similar to the revised increase of 12.55%
for the year ended with the third quarter of 2005, showing no evidence of a
slowdown, OFHEO said. 'Despite recent indications that a slowdown may be forthcoming,
house price appreciation during 2005 continued to hover at near-record levels'
said Patrick Lawler, OFHEO's chief economist."

February 28 - Wall Street Journal (Robert Guy Matthews): "The Congressional
Budget Office said capital-gains tax receipts in 2004 were significantly higher
than it expected, and its early projections indicate the trend continued last
year. The reason, the CBO said, is that taxpayers realized larger-than-expected
capital gains in 2004 and 2005. The revised estimates indicate that taxpayers
realized $479 billion in capital gains in 2004, compared with the $381 billion
predicted by the CBO. Capital gains are taxed at a top rate of 15%; government
receipts were $60 billion, compared with an estimate of $48 billion. For 2005,
the CBO said, capital-gains realizations are likely to total about $539 billion.
The government, as a result, is likely to reap about $75 billion in receipts,
a 25% increase over 2004."

March 1- Bloomberg (Kevin Orland): "U.S. companies' earnings rose by an average
of 15 percent in the fourth quarter as near-record oil prices bolstered energy
producers. The performance marked the 14th consecutive quarter that profit
at companies in the Standard & Poor's 500 Index rose more than 10 percent,
matching a streak that ended in 1996... Earnings at energy companies... rose
49 percent. The growth was the fastest among the S&P 500's 10 main industry
categories. A group including retailers, carmakers and homebuilders gained
1.4 percent, the smallest increase, as General Motors Corp. posted a loss.
Sales for S&P 500 members rose 9.6 percent."

Energy and Crude Liquidity Watch:

February 27 - Bloomberg (Adam L. Freeman and Armorel Kenna): "Eni SpA, Europe's
fourth-largest oil company, will raise investment in exploration and production
to 25.3 billion euros ($30.2 billion) in the next four years as its output
growth slows. The spending figure compares with a budget of 17.4 billion euros
given a year ago for the four years through 2008."

March 2 - Bloomberg (Halia Pavliva): "Russia, the world's second-largest oil
producer, will collect more budget revenue than planned through 2008 because
of higher-than-expected crude oil prices, the Finance Ministry said. The government
expects an extra 560 billion rubles ($20 billion) in revenue this year, bringing
the estimated total for the year to 5.6 trillion rubles..."

February 27 - Bloomberg (Gregory Cresci): "Merrill Lynch & Co., the world's
biggest securities firm by market value, authorized the purchase of as much
as $6 billion of its own stock."

Speculator Watch:

February 28 - MarketNews International (Steven K. Beckner): "Although the
proliferation of credit derivatives has enabled financial institutions to manage
risk 'much more effectively' and generally strengthened the financial system,
they could potentially destabilize the system in the event of a major failure
or default, New York Federal Reserve Bank President Timothy Geithner said.
Geithner...said 'progress' has been made in improving the "infrastructure" of
the credit derivatives market, but said there is still a large 'gap' between
the growth of the market and the ability of firms to manage the business effectively.
Geithner suggested that the favorable economic and financial conditions of
recent years may have masked the scope of the potential problems that could
arise in a time of stress."

March 1- Bloomberg (John Dooley): "Senior bankers from Goldman Sachs Group
Inc., Citigroup Inc. and JPMorgan Chase & Co. are meeting today for a second
time in eight months to resolve a backlog of unconfirmed trades and settlement
problems in the $270 trillion derivatives market. The group, led by Goldman
managing director E. Gerald Corrigan, in July issued a 300-page report demanding
'urgent' effort to improve controls in the expanding market for credit derivatives,
contracts based on debt. New York Federal Reserve Bank President Timothy Geithner,
who leads regulators at today's forum, yesterday said settlement is 'still
quite weak' and the backlog remains 'large.'"

February 28 - Financial Times (Paul Sullivan): "High-net-worth investors will
be putting more money into hedge funds and cash and shying away from the US
stock market this year. According to a survey released today by Northern Trust,
70 per cent of the 1,014 people polled, with more than $1m in investable assets,
already have a portion of their portfolio in hedge funds, private equity and
real estate in the hope of getting higher returns. Younger millionaires - those
under 35 - have a greater interest in alternative assets with 27 per cent of
their portfolios allocated to them. They also have the largest cash positions
of any group, with 19 per cent. Similarly, investors with more than $5m have
26 per cent of their assets in alternative assets and 16 per cent in cash.
The group average was 18 per cent and 13 per cent, respectively."

Global Asset Inflation and Lessons to be Learned:

We are in the midst of the Greatest Global Asset Inflation Ever. Contrary
to the entrenched conventional view, this development is the manifestation
of extraordinary underlying Monetary Disorder and such has profound ramifications.
All the same, surging perceived wealth stokes the delusion that we live in
The Golden Age of Free-Market Global Capitalism. These are especially precarious
times, in particular with respect to the confluence of Bubbling asset markets,
inflated expectations, an epidemic of leveraged speculation, and wide-open
global Credit. In tandem with excesses, New Paradigm notions become only more
outlandish.

"We have to recognize that the very reason capitalism exists is to have asset
price increases. That is the point of capitalism, so we shouldn't bemoan the
fact that asset prices are increasing." Louis-Vincent Gave, in a December interview
with the estimable Kate Welling (Dec. 15, Welling@Weeden, "Brave New World
or Bust").

Well, we definitely should bemoan it. Not only is asset inflation certainly
not "the very reason capitalism exists," the recent Global Asset Bubble Affliction
poses a very serious clear and present danger. The essence of Capitalism is
the free market interplay of supply and demand to determine a structure of
relative prices that create favorable incentives and just rewards - positive
impetus for individual economic agents that in aggregate nurture behavior that
is best for the system as a whole.

Economic Sphere profits should drive the process, not the circumstance today
where a wildly inflating Financial Sphere completely dominates the creation
and dissemination of perceived wealth and resources. Systemic Asset inflation
and Bubbles nurture price distortions and patently unsound incentives. The
essence of robust and dynamic Capitalism is a market system that adjusts and
self-corrects, rewards and disciplines. Asset inflation and Bubbles have a
powerful propensity to avoid self-correction, while meandering to dangerous
and self-reinforcing extremes.

I find it rather ironic that the most outspoken contemporary proponents of
free market Capitalism seem to have the least appreciation for its pressing
vulnerabilities. In this regard, I will forever pin blame on the flawed analysis
of the circumstances and developments that culminated with financial collapse
and The Great Depression, analysis championed by Milton Friedman and, later,
by his "disciples" including our new Fed Chairman.

It was too expedient (by the early 1960s) to paint the Roaring Twenties as
the "golden age" of free market Capitalism and Federal Reserve monetary management,
casting blame instead on post-boom Federal Reserve incompetence. Such a perspective
conveniently whitewashed Credit system and speculative market dynamics that
had fueled myriad financial market Bubbles and fashioned the fateful Global
Bubble Economy. Invaluable lessons learned at deplorable social cost were simply
Wiped Away with a Wanton Stroke of Historical Revisionism. And it remains these
days too easy for the ideologues to intransigently deride the notion of inherent
Credit system and private sector instabilities, a circumstance not all too
conducive to either sound analysis or enlightened policymaking. Especially
in an era of unchecked private-sector "money" and Credit (the reality in which
we must analyze and operate), along with momentous financial and technological
developments, there is great risk in dismissing Capitalism's vulnerabilities.

Regrettably, it seems to have been long forgotten that the very foundation
of a stable free market system rests (at certain junctures tenuously) upon
sound money and Credit. That such a notion sounds so antiquated is an indication
of how far analysis has drifted off course. And, with regard to today's unsound
money and Credit, there has been ample failure in both the public (gross mismanagement
and deficits) and private sector (reckless speculative excess, gross over-issuance
of suspect Credits, and attendant malfeasance) domains. Such an unsound monetary
backdrop, as we have witnessed, will foment unwieldy booms with a propensity
for increasingly deleterious incentives, asset inflation, financial and real
resource misallocation, destabilizing speculation, escalating non-productive
debt expansion, unjust wealth redistribution, and progressive structural economic
maladjustment. Sure, government policies - including untenable future obligations
and derelict monetary management - have been prominent factors in fostering
the boom. But Credit system dynamics will invariably play the prevailing role
in shaping the financial and economic landscape. To disregard the structure
and character of the Credit-creating mechanism - the Financial Sphere generally,
is to do injustice to the analysis.

Even analysts that I respect too frequently point blame for the current state
of affairs on the government "printing press." If I could convince readers
of one aspect of my less-than-conventional analysis it would be to appreciate
that the vast majority of contemporary (electronic) "money" and Credit is created
outside of the domain of the Federal Reserve and resides largely beyond its
control. Most zealous free markets proponents stubbornly adhere to archaic
analysis with a narrow fixation on Fed controlled "money." In reality, unchecked
non-productive Credit expansion is the nucleus of contemporary monetary inflation.
It is also, most disconcertingly, The Bane of Free Market Capitalism.

The essence of our contemporary Credit mechanism - the fountainhead for how
liquidity/incremental purchasing power is introduced into the system - is asset-based
lending and speculating (as opposed to financing real economic investment).
The character of the Capitalistic system cultivated by this financial apparatus
would be quite alien to Adam Smith. He would undoubtedly protest the quality
of contemporary "money" and rebuke the nature of present-day market-based incentives.
The root of the problem is, as I see it, that the preponderance of contemporary
Credit inflation (and resulting price/incentive distortions) emanates from
the expansion of asset and securities-based finance. Such a system is fundamentally
and irreversibly unsound. An unconstrained monetary system that is principally
backed by the market value of speculative assets is inherently unstable and
predisposed to boom and bust dynamics. There is simply no getting around this
fundamental issue.

I have for some time lamented the myriad risks associated with the aggressive
expansion of "Wall Street Finance," in particular the evolution to "Financial
Arbitrage Capitalism" and the attendant preeminence of global leveraged speculation.
Wall Street, their powerful leveraging mechanisms, "structured finance" and "risk
management" capabilities, and their prospering clients - now command the Credit
apparatus. Importantly, they largely govern monetary ("money" and Credit) issuance,
hence system rewards and incentives. What an incredible and - for them - absolutely
wonderful arrangement. This dangerous reality receives zero attention, although
it obviously has monumental ramifications.

I have also repeatedly blasted the Fed for its (pandering) "transparent baby-step" monetary
management, stating that it graciously afforded a dysfunctional system way
too much leeway to adjust, inflate, further capitalize and in the process attain
only greater power and influence. It's now been about two years since Greenspan
telegraphed to the marketplace his intention to cautiously raise interest rates.
A couple of years provided ample opportunity for Wall Street to position itself
to thrive mightily from the current Global Credit Inflation.

The Securities Broker/Dealer index is up 16% y-t-d, 52% over the past year
and 80% since the Fed reversed course and raised rates to 1.25% in June of
2004. There is ample additional evidence that financial conditions have loosened
measurably in the face of rising short-term rates. Manifestly, the expansive
asset-based Wall Street "money" and Credit-creating mechanism was more than
left unchastened; it was profoundly buttressed and emboldened. Timid "baby-steps" garnered
sufficient time for The Street and its client base to adjust their interest-rate
arbitrages (i.e. switch to variable rate financing and instruments) and myriad
carry trade positions (i.e. borrow in yen, Euros, or Swiss francs). At least
as consequential, it provided everyone the opportunity to gear up for a huge
("blow-off") Global Inflation Trade.

This (once in a lifetime?) play is providing an unprecedented litany of inflating
assets and markets to (borrow and) speculate on: private equity and LBOs; global
equities; emerging equities and bonds; high-yield and variable-rate debt, MBS
and "structured instruments;" global real estate; crude oil and energy properties
the world over; and precious and industrial metals and commodities generally.
Since essentially all of these prices have been rising at a faster clip than
global funding costs, there should be no surprise that liquidity conditions
have refused to tighten.

The Fed has a big problem; global central bankers have a big problem. Now
that "Global Wall Street Finance" is fully positioned to profit from all aspects
of the Great Global Inflation Trade, it has every incentive to sustain rampant
over-issuance (Credit inflation). So what if the Fed ratchets up borrowing
costs a little; bond portfolio losses pale in comparison to the ongoing hefty
returns being generated from inflating asset values almost across the board.
Chairman Greenspan was masterful in manipulating leveraged speculating community
returns to achieve his goals. Lowering short-term rates provided an immediate
incentive for speculators to boost leveraged bond bets, in the process lowering
bond yields, stimulating borrowing and risk-taking, and increasing system liquidity.
It was all too magical - the most powerful and abused monetary transmission
mechanisms ever.

I'll conjecture that the (overconfident) Fed fully expected that it would
retain the power to simply reverse this manipulation - cautiously raising rates,
reducing speculator returns on the margin, and judiciously managing excesses.
Think again. To accommodate mature Credit and Asset Bubbles is to guarantee
that they expand, disperse and morph. Expectations that rising rates and restrained
U.S. mortgage lending would tighten financial conditions generally, temper
consumption and the U.S. Current Account Deficit, and work to impinge global
liquidity excess are not coming to fruition.

Increasingly, the Fed and global central bankers must be observing the myriad
avenues for rampant Credit and speculative excess (associated with The Global
Inflation Trade) that have blossomed of late and wonder what the heck it will
now take to rein things in. The Fed and global central bankers fell so far
behind the curve. The ECB did move again this week and, more importantly, indicated
that there was likely more on the way. And when, probably in the near future,
Japan joins in, we'll have the first concerted global "tightening" in quite
some time. Little wonder global bond markets are on edge and currency markets
are unsettled. Not surprisingly, frothy global equity markets were generally
oblivious.

It is certainly not uncommon for highly speculative markets to spite major
fundamental developments until it is too late. Indeed, this is the very nature
of Credit-induced booms and Asset Inflations: system incentives and rewards
become totally defective. It is well-known to speculators that the greatest
potential returns often present themselves in a final "blow-off" frenzy. If
such a dislocation does unfold throughout global equity markets, it would be
very bad news for central bankers and an unwelcome development for international
bonds, not to mention setting equity markets up for an unavoidable drubbing.

Milton Friedman used to claim that there was no such thing as destabilizing
speculation. He was wrong. We continue to have a ringside seat for the reprehensible
consequences of unsound money and Credit and the resulting Asset Inflation
and Bubbles. My only consolation will be if lessons are learned and forever
retained from the experience.